The Law On Public-Private Partnerships approved by Parliament Resolution No. 7 on 24 February 2012 defines a Public-Private Partnership (PPP) as a “A long-term (up to fifty years) interaction between public and private partners for engaging the private partner by the public partner in designing, financing, construction, rehabilitation, reconstruction of assets, as well as the management of existing or newly created assets, including infrastructure assets”. In other words, a PPP is:
No. The PPP Law clearly states that it does not apply to privatization and denationalization of the state-owned property and state-owned enterprises. Privatization and denationalization are the disposal (usually the outright sale) of assets or functions owned by the government which are not considered a core public function of a government. Once the asset or function has been privatized (or sold), the government has no or very limited further formal relationship with the party who bought it.
No. These are mainly short-term contracts where many of the risks remain with the public partner. They fall under the Law of the Republic of the Kyrgyz Republic “On public procurement of goods, works, and services”.
For clarity, the following are not considered PPPs :
Yes. These road maintenance contracts supported by ADB are good examples of PPPs of another type commonly known as ‘availability-based payment structures’. For some infrastructure and services where charging a user for the service is not possible or not desirable, government itself can buy the service (in this case the availability of a properly maintained road). This type of contractual structures thus widens the scope for PPPs to other sectors like social services, government buildings, etc.
This is an important question as sometimes people think that PPPs are ‘for free’ or ‘free money’ – i.e. that a private firm will invest in providing a service without government, taxpayers or users having to pay for it. This is not the case. In a PPP the private partner may provide all or some of the financing needed (for construction, operation and maintenance), but the partner will expect to get its investment back with appropriate profits. The project therefore has to generate enough income to cover all the expenses and the returns needed by the private investor. Income can come from charging users (and government giving up these revenues), by government paying for the service on behalf of users, by commercially exploiting related assets (that could otherwise have been used), or by some combination of these. In all cases someone is having to pay to make the project commercially viable. However a well-structured PPP can usually achieve better value-for-money for user or government payments and clever structuring of commercial exploitation can create a cross-subsidy effect.
At the centre of a PPP is a contract signed between a public contracting authority and a private partner. The contracting authority is usually the public organization (central or local government body) responsible for the infrastructure or services and authorized to sign such a contract.
The private partner is defined in the PPP Law as “an individual entrepreneur or a private sector legal entity implementing an infrastructural project or the social services project in accordance with the Public-Private Partnership Agreement“.. Depending on the project specifics, the private partner may also bring in separate companies to do the construction, the operation and the maintenance, and in some cases to provide inputs (e.g. water for a water purification facility or coal for a thermal power station). Depending on the project, there may also be formal arrangements with the users of the service (e.g. for electricity an agency that buys electricity from a power plant). There are often also insurance companies involved providing insurance, as well as financial institutions (e.g. banks). To organize this, the lead company often sets up a Special Purpose Company (SPC), which is a company whose only objective is to undertake the PPP project. The SPC then enters into agreements with all of the other private partners involved. In some cases there may also be a regulatory body involved.
Beyond this group, sometimes also consumer organizations, oversight bodies, NGOs, community groups and other such bodies are mentioned as ‘partners’, however these partners are usually not part of the core PPP contracts and arrangements.
Often construction companies are first to respond to PPPs announced by government, since they have been doing traditional government construction projects in the past. However companies that operate services (e.g. water companies, power producers, transit operators, etc.) are also keen to respond. As the PPP market develops in a country, it is usual for the local industry to reorganize in response. Specialized project development firms can emerge that are skilled at bringing all the needed partners together to respond to PPP projects. Often construction companies buy up smaller project management firms to enable them to respond to integrated PPP projects.
Foreign firms with more experience with PPP projects are often very important players to bring skills, expertise and technology into the local market.
Foreign firms can respond to PPP projects and become partners in a PPP. However the requirements regarding foreign investment in the Kyrgyz Republic need to be followed.
PPP projects are usually financed by a combination of equity (an investor’s own money) and debt (money usually borrowed from a bank). Equity is often sourced from the companies taking the lead in the PPP, but can include wealthy individual investors or institutional investors (e.g. pension funds). Institutional investors often like PPP projects as they need large amounts of money to be invested with returns over a long period of time. Such projects suit the investment needs of these institutional investors.
Banks working alone or more commonly together usually provide loans when projects need debt financing. To finance PPPs, bank loans often need to be large and to have long maturity periods. This can be a problem during early stages of a country’s PPP market development.
Projects of large investment size often need foreign equity and debt providers, as local investors and banks may not be able to provide sufficient financing at the required terms. Multilateral development banks such as the ADB and the World Bank are often especially interested to finance PPP projects, either directly or through guarantees.
Well-structured PPPs, where the private partner can determine how a service can best be provided, where risks are well allocated, and where the project is awarded through competitive procurement, can offer better value-for-money than traditional delivery by government. Some of the main benefits private partners can bring are:
Considering the experience of many other countries, there seem to be three main reasons why the Kyrgyz Republic should consider PPPs:
By involving a private company the project can often be delivered in a more efficient and cost effective manner than by the government or a State-Owned Enterprise itself. This is because if the PPP is well-structured, the private company will find more innovative ways of delivering it, and will usually do the maintenance and operations better and more efficiently. Involving a private partner can also make financing available where public funds are lacking.
Although the government can almost always borrow money at better rates (more cheaply) than private companies, private companies can almost always design, operate and maintain infrastructure and services better than the government. In well-structured PPPs the additional benefits that private companies bring usually outweigh the cheaper costs of public financing.
There can be. In some cases this competition from other services is very important to create value in a PPP, for instance where alternative routes prevent a toll company from setting toll prices too high.
However, most PPPs require private companies to make significant investments that will take many years to pay off. If the government competes against or undercuts these firms it can seriously undermine their investment and business.
PPPs can help the government of the Kyrgyz Republic to get more services from its budget in a few ways. Well-structured PPPs can deliver services more cost-effectively, they can create value by better exploitation of assets, and they can spread out the budget needs of government by moving financing to the private sector. For example, if a public partner does not have the required investment amount in its budget to invest in a new project this year, it could enter into a 15-year contract with a company to finance and provide that project and then the investment amount would be spread over 15 years. But there is a limit to how much this can be done by the government.
PPPs always require sufficient revenues from service users or from government payments to be commercially viable. There is a limit to how much service users can pay and how much the government of the Kyrgyz Republic can raise through taxes. PPPs can help, but they will not solve all problems.
PPPs are often started first in sectors with revenue streams from users than can be separated, such as toll roads. However, using availability payments (where government ‘buys’ the services) opens PPPs up in many other sectors. Specific sectors include:
Yes. It is becoming more common in the social sectors to have the facilities (e.g. school buildings, hospital buildings) developed and managed by private partners, while the public partner focuses on providing the actual service (e.g. teaching, medical treatment). In some cases the actual social service itself can also be provided by private partners as well as the facility.
In theory, almost any project could be structured as a PPP. The question is whether it is actually worthwhile making it a PPP. This needs to compare the potential benefits that a PPP arrangement for the project would provide, against the additional costs (e.g. transaction structuring) that would be required to structure it as a PPP. The following criteria can help to guide the decision:
A PPP can include both the infrastructure (facility) and the service together, or the infrastructure alone, or the service alone. Integrating the infrastructure and the service together can optimize what kind of infrastructure is provided to best suit the service that is to be delivered. If the infrastructure and service are separated, careful attention must be paid to the interface between them. Is it the right infrastructure for the service, and what effect might the service have on the infrastructure?
It is also possible to have one PPP for the provision of the infrastructure and another PPP for the provision of the service. For example, a railway line may be developed and maintained through a PPP based on availability payments by government. The train service might be another PPP with a private operator obtaining revenues from fee paying passengers. Again careful attention is needed to the interface between the two PPPs.
Yes. If it makes sense to have only part of a service or infrastructure delivered by a private party, then there is no reason why this should not be the case. However, always consider that private companies can often create value through better integration such as integration between the infrastructure used and the service to be provided, between the design of facilities and their maintenance over time, etc. Dividing up a service can reduce these integration advantages. Also, dividing up a service can cause interface problems in the connection between what the PPP does and the part of the service or facility that stays under government control.
In some sectors, ‘unbundling’ is used to divide the whole services into different parts with different forms of PPP in each. A common example is the power sector, where generation of power may be organized through PPPs, while the power transmission lines are managed by the public sector.
Smaller projects may also be suited to PPPs, but as they are smaller it may not be worthwhile to follow the full procedures and arrangements required to structure a large PPP transaction. Smaller projects can therefore be procured following the existing procurement regulations that apply.
On the other hand, projects and the associated risks should also be manageable for the private partners and need to take into account the size of the economy and possible constraints for the financial sector in doing business in the Kyrgyz Republic.
PPPs are definitely easier to arrange for infrastructure and services which are more commercially viable and profitable, since less external support is needed. For infrastructure and services which are less profitable, such as social services or services in poor areas, PPPs probably need extra government support to make them viable. This may be done by the government itself by buying the services from the private partner (availability payments), by some form of direct subsidy, or by indirect subsidies by for example allowing the private partner to use commercially viable assets in return for providing the service. Several countries have set up Viability Gap Funds, which are funds the fill the gap between what users can pay and what is needed to make a project commercially viable.
No. The public partner remains accountable for ensuring the service is delivered. The contracting authority must manage the private partner to make sure the services are delivered satisfactorily. If they are not, the public partner is responsible for finding a solution. This is one reason why a contracting authority needs to make sure PPPs and PPP contracts are well structured.
The key question a public partner should ask is “what is the most effective way to deliver the infrastructure and services we are responsible for”: direct delivery or using a PPP? In both cases the public partner remains responsible for making sure the service is delivered, but how you do it is quite different. If you use a PPP approach your role will be to structure, procure and monitor delivery of the service, rather than doing it yourself.
PPPs are contracts between the government and private firms lasting over many years. The binding nature of PPP contracts does not change when the political leadership of government changes. If a new government did decide to terminate a running PPP contract for arbitrary reasons (e.g. purely political), it would encounter a similar response from companies and financial markets as if it defaulted on government debt. Companies and debt providers would immediately see PPP projects as more risky, market response to projects would reduce (or even stop completely), and all private partners would require higher returns to compensate for the risk. In other words all PPP projects would become more expensive and offer less value-for-money.
Private investors may require an insurance to protect them from contract breaches which can be provided by development partners like the Asian Development Bank or the World Bank (though its Multilateral Investment Guarantee Agency)
When a public partner moves from directly delivering a service to delivering it using a PPP the role of the public partner changes considerably. Instead of direct provider, the role of the public partner becomes that of a manager for the delivery of the service by a private company. Staff involved in operating and maintaining the service would no longer be employed by the contracting authority, but by the private partner. The public partner will need staff skilled at structuring, procuring and managing PPP contracts and arrangements. Typically, the public partner will require fewer staff overall, and the staff it needs usually require higher qualifications and management expertise. This can present exciting opportunities for government employees.
There are many incentives for a manager in a public agency to consider PPP projects, including:
Public sector unions can sometimes oppose PPP projects, especially where they believe the PPP may cause job losses or changes in employee conditions. Such concerns of unions are more common for existing (brownfield) projects involving the restructuring of an existing public service into a PPP arrangement, than for completely new (greenfield) projects.
In such cases, good consultation with unions is important. This falls under the mandate of the Ministry or public partner for that sector. Many concerns raised by unions can be addressed through how a PPP is structured, provisions for the transfer of workers to the new company, and so on.
The best way to develop the PPP skills of staff is to actually implement PPP projects. It is very common to also use specialized technical, financial, legal and procurement consultants for PPP projects, since they bring in highly specialized (and expensive) skills that the government does not need to have all the time.
PPPs need to be profitable to the private partner or they will not invest in and do them. The government and users benefit from this by getting better value-for-money in the services delivered. A profitable project should not be a concern. If the PPP is structured well and risks are allocated properly, the private partner should achieve a reasonable profit if it performs well, and the services should indeed be better value-for-money.
It can happen however that for some reason a PPP project becomes ‘super profitable’, where the private partner has profits far above what can be expected for a project of that nature and risk profile. If a contracting authority is concerned this might happen it can include a ‘benefit share’ provision in the PPP contract, in which profits above a set level are shared with government.
The single most important requirement to establish a strong PPP market is to bring a pipeline of well-structured PPP projects to the market. Also important are the following:
Lifecycle optimization means the relationship between how something is designed and built today, and how much it costs to operate and maintain over its working life. Cheap construction may mean heavy maintenance costs and disrupted operations in later years, but too expensive construction can be wasted as it may be higher than what is actually required to do the job. Private companies are good at getting this balance right (lifecycle optimization) when their profitability is affected by design, construction, operations and maintenance over the project lifecycle.
This should be worked out for each project based on technical and financial analysis. Generally, the duration of a PPP contract is linked to the lifespan of the main facilities or assets involved. The contract often lasts until the facility or asset has to be replaced. But contract duration also needs to take into account how long the private party needs to get their investment back with a reasonable return on investment. So the duration will be affected by the investment size, whether this is all privately financed, and the revenues for the project.
Four issues are especially important:
An Output Specification focuses on the desired outputs of a service, rather than a detailed technical specification of how the service should be provided. This lets the private partner develop and propose innovative solutions for providing the service. If an Input Specification is used in which all the details of facilities, equipment, procedures and so on are specified by government, then the private partner does not have much room to innovate and improve.
Allocating risks between partners is one of the most important ways to create value with PPPs. When a partner is made responsible for a particular PPP project risk then it will do whatever it can to make sure that the risk does not occur. For example, if the private partner is responsible for the risk that a facility is not built on time (e.g. it must pay a fine for delays, or it cannot charge users until the facility is ready), then it will do everything to make sure the facility is ready on time. This is what creates an incentive for more efficiency.
But risks are transferred between partners at a price. If the contracting authority allocates a risk to the private partner, the private partner will need more payment to cover this extra risk. So risk transfer only works when the performance incentive it creates is worth more than the extra cost charged for the risk. This happens when the risk is given to the partner who can manage that risk best and at the lowest cost. Some risks are best treated by sharing them between the partners.
Practically, PPP risks are defined in a risk matrix (a table on which all risks are identified and it is indicated to which partner each risk is allocated). Then this is translated into how the project is structured, into the financial, payment and monitoring/penalty arrangements, and into the PPP contract.
No. If you transfer a risk to a private partner that it cannot manage well itself , it will need to have a very high financial reward in return (in other words the price of the PPP for the government will go up). This can make a PPP project so risky for a private partner that none will be interested, or it can simply make the project so expensive for government that it is not worthwhile.
Do note that risk allocation in PPP projects is also sensitive to the stage of the PPP market in a country. Typically in earlier stages when PPP projects are new to private partners the contracting authority may have to carry a bit more risk to support deal flow than can be achieved in projects as the market matures.
Competition is absolutely crucial in the sense that it drives firms to perform better and results in better prices. Having competitive procurement – i.e. companies competing against each other – for the selection of a private partner is a key value driver, and is most intense during the formal procurement process of the project. This is a unique moment in which the government can create significant value.
When a private partner is selected and the PPP awarded, the contracting authority can still use competition indirectly by the threat of replacement of the private partner if it does not perform adequately. In some cases it is possible to have competition from alternative service providers or services as a way to keep competitive forces ongoing.
PPPs can be initiated by national government, provincial governments, State-Owned Enterprises, local authorities, government agencies or any other government unit. These are known as the public partners.
PPPs can also be initiated by a private company that submits an unsolicited proposal to the government.
The main steps in establishing a PPP project are:
PPPs usually take longer to structure and procure than traditional project procurements. It also depends on how complicated the project is, and how experienced the contracting authority, its advisors and the private bidders are at such projects. Typically, structuring a PPP can take anywhere from 2 to 12 months, depending on how complex the project is. It is usually necessary to test the project with the market and build market interest. The formal procurement typically takes between 6 and 12 months to complete to financial close.
Projects that meet the definition of PPPs must follow PPP procurement regulations and procedures. These regulations and procedures are outlines in the PPP Law of the Republic of The Kyrgyz Republic.
The PPP Law of the Republic of the Kyrgyz Republic sets out the main institutional arrangements for the development of PPPs in the country as follows:
Negotiation between the contracting authority and private partner does indeed have a place in good PPP procurement. In Europe, there is a formal ‘competitive dialogue’ procedure which can be used early on in the procurement process if the contracting authority wants private partners to contribute to how the project is structured and specified. Generally, PPP procurement procedures allow the contracting authority to ask bidders to clarify their submitted proposals, and to improve them, before making a final selection. This is important to maximize the value-for-money of bids.
If the contracting authority follows the relevant procurement procedures correctly and undertakes any negotiations in a well-recorded, transparent and competitive manner, the process will be fair and defendable.
Traditional government procurement usually awards the contract to the compliant offer with the least expensive bid. When dealing with PPPs, the concept of value-for-money is usually used instead of the lowest bid price. The compliant proposal that offers the best value-for-money should be selected. It is possible to still use a Least Cost approach to evaluating PPPs, but the evaluation needs to be set up accordingly to make sure quality/quantity and risk are duly considered.
Value-for-money means the relationship between the quality and/or quantity of service provided, the risk for government, and the price of a PPP project. When these factors are combined, the best combination can be identified – offering the best value-for-money.
The value-for-money of a PPP can be estimated before the procurement process when the public partner needs to decide whether to deliver the project as a PPP or through traditional procurement. At this stage the value-for-money can be estimated using a Public Sector Comparator Model. This is a financial model which compares how much it would cost to deliver the project as a traditional government project and how much as a PPP project. The model includes all the direct project costs and revenues, as well as the costs of the project risks.
Later in the procurement process, value-for-money assessment is used to for evaluating proposals submitted by private bidders. Here a PPP Reference Model is used, which is a financial model of what a private offer for the project can be expected to be. The submitted bids are compared against this taking quality/quantity, risk and price into account.
This is the responsibility of the contracting authority doing the PPP project and the PPP Centre. Keep in mind that value-for-money is an important, but not the only consideration when evaluating a PPP. Evaluators should also consider things like the capacity to implement the project, the effect the contract may have on the budget, implications for service users and the public, etc.
The effect on the contracting authority’s budget depends on what kind of PPP project it is. There can be many considerations and adjustments, including:
So when doing a PPP the contracting authority should carefully analyze how it will affect its budget and what changes need to be made. It is especially important to assess whether the PPP will be affordable to the contracting authority over its project life. The Ministry of Finance should be consulted regarding this.
The risks that the contracting authority retains or shares when a PPP project is awarded should be clearly identified and transparently recorded. The contracting authority should consider how each of these risks can best be managed, and should identify and take whatever measures it can to manage them. It is also good practice to identify who is responsible in the contracting authority for monitoring and managing each risk.
When the contracting authority considers that a risk is very likely to happen in any year, then it should add a provision in the budget for that risk. Risks that are not considered likely to occur need to always be transparently recorded, but specific budget provision does not need to be made.
Some PPP projects do require additional support to be commercially viable or bankable. Especially for initial projects when PPP projects are less familiar in the Kyrgyz Republic, it may be necessary to provide additional support. Government support for a PPP project can be direct, such as structuring the project with availability payments or with a partial subsidy, or it can be indirect by providing for example some form of guarantee to the private partner or its financiers.
It is crucial that the contracting authority considers very carefully what effects any support it gives will have on the risk structure of the PPP project and on the private partner’s incentives and performance. Also, the budgetary impacts and affordability of support needs to be assessed. The Ministry of Finance needs to be closely consulted and must authorize any such support.
There are a few things that can be done:
The collapse of a PPP agreement or the default of a private partner can be very messy and costly and generally benefits no one. The allocation of specific risks to the private partner in a PPP ensures that good performance is encouraged. A well-structured PPP contract should lay out clearly how the performance of the private partner will be monitored, and what actions will be taken if the performance is not adequate. It is a good idea to follow the ‘tickle-hurt-kill’ approach – have provisions for light penalties or warnings when underperformance first occurs (‘tickle’), with increasing measures and penalties if performance is not improved (‘hurt’), and with default procedures only where all other measures to improve performance have not worked (‘kill’).
Specific provisions should be included in the PPP contract covering how such future issues should be dealt with. Also make sure that a positive working relationship is maintained between the contracting authority and the private partner throughout the implementation period. This makes it easier to discuss any changes which may need to be made.
The PPP contract will have provisions explaining precisely what happens when the end of the contract period is reached. Often the PPP contract period is the same as the lifespan of the related infrastructure, so it is common that a new PPP is launched to replace or rehabilitate the infrastructure and run it in the future.
There is no single, prescribed route to follow for the initial stages. Depending on your situation, the following can be useful steps to take:
All PPPs need champions and drivers, so consider forming a team within your public agency comprising persons with the right skills and interest to take forward PPPs
Consider preparing an outline ‘Sector Note’ on how PPPs could be introduced in your sector or the particular infrastructure or service you are concerned about. This can be a basis to have discussions within your own public agency about possible projects and how to proceed. IPA can also assist with identifying the right opportunities
If you already have a specific PPP project in mind, prepare a Project brief. Again this is a basis for discussion in your agency. Contact the IPA who can advise you on which other agencies should be consulted
Contact IPA regarding both the sectoral application of PPPs and particular PPP project ideas. The PPP Centre can advise you on further consultations that may be required, and how to get internal and potentially external support to further develop your PPP initiatives
When your PPP concepts are more formulated and you wish to proceed further, IPA can also advise you on what formal steps need to be taken to further develop your projects
The contracting authority should appoint a senior official as Project Manager for a PPP transaction supported by a staff team. It is usually advisable that the Project Manager uses external consultants for various parts of structuring and procuring PPP projects. This is because often quite specialized technical, financial, legal and procurement expertise is needed which may not be available in your public agency.
It is common for PPP transaction advisors to be appointed to assist with PPP transactions, especially for large, complex or first-time projects. Consultants commonly used for PPPs are:
Technical advisors – to assist with technical aspects and especially output specifications, as well as environmental and social impact issues
Legal advisors – for advising on the legal basis for the PPP and for drafting PPP contracts
Financial advisors – for financial structuring, preparing financial models (e.g. PSC), and evaluating value-for-money of proposals
Procurement advisors – to advise on the best procurement route and procedures, evaluation criteria, etc.
Marketing / communication advisors – for large or complex projects it is sometime needed to have significant marketing and communication activities
Make sure the consultants you appoint have proven experience and expertise to properly support you.
Public agencies interested in taking forward PPP initiatives and projects may contact IPA to identify adequate support. To financially support the preparations of PPP projects, the government in accordance with international best practices has established the Project Development Support Fund (PDSF) as approved by Government Resolution No. 147 on 17 March 2014.
A regular payment made by the government to a private partner in a PPP provided the private partner provides the required infrastructure and/or service at the required level. Availability Payments can be used instead of the private partner in a PPP collecting revenues directly from the infrastructure or services users. Availability Payments usually include penalties if the infrastructure or service is not available at the required level
Least Cost Approach
A traditional procurement approach where projects are awarded to the qualifying bidder that offers the lowest price. The Least Cost approach can still be used for PPPs, however the evaluation of bids then needs to be designed to ensure that the quality and risk of bids are also taken into account
Defining what is required from a project (infrastructure and/or service) as an output (what), and not as an input (how). Defining projects as outputs lets private partners develop and innovate the best way of achieving those outputs
The person/s appointed by a public partner to manage and conduct a PPP transaction
Defining the risks related to a project and giving responsibility for each risk either to the private partner, the contracting authority or sharing the risk between them. How each risk is allocated effects how the partners are incentivized to perform
The way in which what a PPP offers to the government or service users is measured, often in comparison to the government doing the project in the traditional way. The value-for-money calculation includes the quality, risk allocation and price of the project
Whole Life Project Costing
Looking at all the costs and revenues of a project over its whole operating life, not just at what the initial capital costs of the project are. This approach is very important for PPPs as it focuses on how a project can be optimally delivered